COST OF CAPITAL : PROBLEMS

1. A company issues 10% irredeemable debentures of Rs.1,00,000 . The

Company will come under tax bracket of 55% calculate the cost of
debenture if they are a] issued at par value b] Issued at 10% premium c]
issued at 10% discount
2. A company issues 8% debentures of Rs.5,00,000 . The Company will
come under tax bracket of 60% calculate the cost of debts before tax as
per less after tax if they are a] issued at par value b] Issued at 10%
premium c] issued at 10% discount
3. A company issues 10% debentures of Rs.1,00,000 . The Company will
come under tax bracket of 40% calculate the cost of debts if they are a]
issued at par value b] Issued at 10% premium c] issued at 10% discount
4. A company issues Rs.50,000 , 8% debentures of Rs.10 each at a
premium of 10% The flotation cost is 2% . Tax rate is 60% . Compute the
cost of debts.
5. A company issues Rs.1,00,000 , 10% debentures of Rs.10 each at a
premium of 10% The flotation cost is 2% . Tax rate is 60% . Compute the
cost of debts.
6. A company issues Rs.1,00,000 debentures of Rs.10 each. The interest
rate is 10%. Tax rate is 60%. Brokerage cost will come around Rs.10,000
Compute the cost of debts.
7. A company issues Rs.10,000 debentures of Rs.100 each. They are issued
at discount of 10% and carries interest rate of 10%. Tax rate is 50%.
Brokerage commission and flotation cost comes around Rs.20,000
Compute the cost of debt capital.
8. A company issues Rs.10,000 debentures of Rs.10 each. They are issued
at discount of 10% and carries interest rate of 10%. Tax rate is 60%.
Brokerage commission and flotation cost comes around Rs.10,000
Compute the cost of debt capital.

COST OF REDEEMABLE DEBENTURES

1. A Company issues debentures of Rs.10,00,000 and realizes Rs.9,00,000

after allowing 10% commission to the brokers. The debentures are
carrying the interest rate at 12%. The debentures are due to maturity at
the end of the 10th year. Calculate the cost of debts by assuming the tax
rate at 50%.

2. A company issues debentures of Rs.1,00,000 and realizes 98,000 after

allowing 2% commissions to the brokers interest rate is 10%. Tax rate is
55% , maturity period is 10 years. Calculate the cost of debts.

3. A company issues debentures of Rs.25,00,000 and raised Rs.24,50,000

after allowing commission to the brokers and underwriters the debentures
 are carrying the interest rate of 10%. They are the due for maturity and the
end of 15th year the tax rate is 60%. Calculate the cost of debts.

4. A company issues 5000 ,12% debentures for Rs.100 each and at discount
of 5%. The commission payable to the underwriters are Rs.25,000. The
debentures are redeemable after 5 years. the tax rate is 50%. Calculate
the cost of debentures.

5. A company issues 25000 ,12% debentures for Rs.100 each . tax rate is
40%. Calculate the cost of debentures if they are issued a] at par value b]
at 10% premium c] at 10% discount.

COST OF PREFERENCE SHARES

1. A Company raises preference shares of Rs.1,00,000 by issue of 10%

preference shares of Rs.10 each. Calculate the cost of preference shares
if they are issued at 10% premium and at 10% discount.
2. A company raises preference shares of Rs.5,00,000 by issue of 10%
preference shares of Rs.10 each. Calculate the cost of preference share
capital if they are issued at 10% premium and at 10% discount.

3. A company has 10% redeemable preference shares redeemable of the

end of the 10th year. The Underwriters commission is 2% of the value of
preference capital of Rs.1,00,000. Calculate the cost of preference capital.

4. A Company has 12% redeemable preference shares of worth

Rs.5,00,000. They are redeemed at the time of 15th year. The expenses
on issue will come as Rs.30,000 . Calculate the cost of preference capital.

COST OF EQUITY

1. A company offers equity shares for public subscription of Rs.50 each at a

premium of 10%. The flotation cost is 10% of issue price. The rate of
dividend is 20%. Calculate the cost of equity.

2. A company offers equity shares for public subscription of Rs.10 each at a

premium of 10%. The flotation cost is 5% of issue price as underwriters
commission. The rate of dividend is 20%. Calculate the cost of equity.

3. A company offers equity shares for public subscription of Rs.100 each at a

premium of 10%. The flotation cost is 10% of issue price. The rate of
dividend is 20%. Calculate the cost of equity.

4. The equity of ABC Ltd holds the market price value of Rs.15 where its
face value is Rs.10 . Every year the shares are earning dividend of Rs.12
per share. Calculate the cost of equity.
5. The equity of XYZ Ltd holds the market price value of Rs.120 where its
face value is Rs.100 . Every year the shares are earning dividend of Rs.20
per share. Calculate the cost of equity.

6. The current market price of an equity share of a company is Rs.90. the

current dividend per share is Rs.4.50. Incase the dividends are expected
to have growth rate of 7%. Calculate the cost of equity.

7. The current market price of an equity share of a company is Rs.120. the

current dividend per share is Rs.6. Incase the dividends are expected to
have growth rate of 8%. Calculate the cost of equity.

8. A companies share capital consisting of 1,00,000 equity shares of Rs.100

each .the current earnings per share is Rs.10 . The company wants to
raise additional funds of Rs.25,000 by issue of shares .calculate the cost
of equity if the flotation cost comes at 10%.

9. WEIGHTED AVERAGE COST OF CAPITAL

The following are the details regarding the capital structure of the company.
Type of capital Book Value Market Value Specific Cost
Debentures 2,00,000 2,40,000 8
Share Capital 2,00,000 2,20,000 10
Preference Capital 1,00,000 1,40,000 9
Retained Earnings 50,000 7
You are required to determine the weighted average cost of capital by using (a)
Book value as a rate (b) Market value

The following are the details regarding the capital structure of the company.
Type of capital Book Value Market Value Specific Cost
Debentures 40000 38000 5
Share Capital 60000 120000 13
Preference Capital 10000 11000 8
Retained Earnings 20000 9
You are required to determine the weighted average cost of capital by using (a)
Book value as a rate (b) Market value